Higher power prices loom

The future wholesale price of electricity is already rising, following decisions by three of the country's electricity generators to close more than 1000 megawatts of installed generation capacity that runs on gas and coal.

Auckland-based generator-retailer Mighty River Power [NZX: MRP] highlighted the shift in slides accompanying its earnings announcement for the year to June 30.

One slide shows that since balance date, some eight weeks ago, the wholesale electricity settlement prices on the ASX electricity futures market have risen by some $6 per MWh, to about $80 for electricity delivered in 2017. Current prevailing contract rates for large commercial electricity loads are said to be about $70-75 per MWh.

Contact Energy is removing its 400MW gas-fired Otahuhu-B unit from service at the end of September, Genesis Energy is committed to withdrawing 500MW from the market by closing its elderly gas and coal-fired plant at Huntly by the end of 2018, and MRP is closing its 170MW Southdown gas-fired plant.

All are judged uneconomic after a major switch in the past five years to geothermal energy for baseload electricity. This is displacing much of the demand for so-called thermal generation units, burning fossil fuels, and the construction of fast-starting 'peaker' plants, which are built to run on gas to meet occasional gaps in supply.

The MRP slides show that closing thermal generation capacity will start to have an impact on security of electricity supply by about 2019, with the extent of the impact dependent on whether and how strongly demand for electricity picks up.

From 2019 onwards, currently installed generation looks unlikely to be able to meet national grid operator Transpower's "winter energy margin" because of the announced thermal plant closures.

The winter energy margin is the buffer the electricity system operator believes is necessary to prevent a threat of brown-outs or black-outs during periods of peak demand. New Zealand has most commonly faced such circumstances during winters following low inflows during summer to South Island hydro catchment lakes.

After seven years of static demand, a combination of increased dairying, irrigation, migration and a cold winter pushed demand in the year to June 30.

Annual load growth of "between 1-2% a year" was anticipated, says MRP chief executive Fraser Whineray. This saw MRP's underlying earnings drop $45 million to $145 million, reflecting the lowest ever hydro inflows to its Waikato catchment in the year under review.

The fact that there had been no case to use thermal power stations to cope with reduced hydro output in its worst hydro year showed why closing Southdown made sense, Mr Whineray says. Efforts are being made to sell the Southdown plant. Its LN6000 turbines are among the most widely used in the world.

The company is also selling its Chilean geothermal assets and warns there could be a further writedown of up to $10 million against their disposal.

Writedowns on the disposal of US geothermal investments delivered an $83 million hit to net profit after tax, which was down 78% to $47 million, and included a further $44 million writedown on the Southdown assets.

(BusinessDesk)